The Impact of ES&G Factors on the Board

The Impact of ES&G Factors on the Board

In our continuing series, Corporate Governance Expert David Beatty offers insights into how ES&G factors may affect your corporate board of directors.

The Impact of ES&G Factors on the Board

David Beatty:

Today’s literature on corporate governance is overwhelmed by notions of ES&G, environmental, social and governance matters. Environmental things like deforestation, pollution, climate change. Social matters like war, rights of workers in foreign factories, those kinds of things. And governance matters going from the boardroom of publicly traded companies all the way through to the government of various organizations and our own elected governments. ES&G, it’s everywhere.

So what does that actually mean for a board of directors? Because a board typically in North America for sure has been operating under the edict of Milton Friedman from 1970. In 1970 he said, the business of business is business. Therefore, the only person you really care about is the shareholder of your company. The purpose of a publicly traded company is to look after its shareholders.

Well, ES&G kinds of opens that up to a variety of new stakeholders. To some extent, boards and management teams have always been conscious of the workers, the environment in which they are working, their suppliers and their customers, as well as the communities in which they work. That’s true. There is a broadening beyond simple shareholder allegiance, but now the push is much greater. And the push is coming from the large institutions that own approximately 75% of all publicly traded companies around the world. Institutions like BlackRock. 7.1 trillion in assets managements, and they have something in the order of 4,500 corporations that they own shares up, often two or 3%. State Street Global Advisors, 3.1 trillion. Vanguard, the same kind of number.

Top 10 institutions will own probably 40 to 50% of all publicly traded company shares around the world. And across all of those institutions, there’ll be very few unaffected companies. Now, the institutions are getting worried about broader things than quarterly earnings. The institutions themselves are largely there to look after pension funds. Pension fund assets have to be managed in the longterm. And so there’s a nice convergence between thinking long-term and being the owner of your company. And that’s going to mean that you’re going to have to take into account as a director and as a management team, you as a director are going to have to lead them to more consciousness of other stakeholder groups, ES&G.

You’re going to read more and more about this. It’s going to mean more and more to your owners, and there’s going to be more and more discussions between those owners and you. State Street Global Advisors for example, now has a team of 12 people. They call them their stewardship team. 12 people who do nothing, but spend their lives talking to board chairs and to senior managers about a broader definition of business success than the quarterly earnings.

You as directors are going to have to shore up the management team, because if you’re widely held, the pressures on your company to perform quarter after quarter are enormous. And if you’re not performing well quarter after quarter, another group of people called activists will come knocking on your door. This can divert a huge amount of management time and effort. Unless you the board are more responsible for the medium and longterm, then the pressures in the short-term and the activism imply.

So, being a director was never easy. It’s certainly not getting easier in the COVID era and is certainly not getting easier with the pressures to get more involved with other ES&G matters. Things are getting tougher. You’ve got to get on the job.

David Beatty is an adjunct professor and Conway chair of the Clarkson Centre for Business Ethics and Board Effectiveness at the Rotman School of Management. Over his career, he has served on more than 39 boards of directors and been chair of nine publicly traded companies. He was the founding managing director of the Canadian Coalition for Good Governance (2003 to 2008). A version of this article will also appear in the Winter 2017 edition of Rotman Management, published by the University of Toronto’s Rotman School of Management.


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